DELAWARE CORPORATE LAW
BULLETIN
Delaware Court Invalidates
Commonly-Used Corporate Classified
Board Provision as Contrary to
Delaware Law
Robert S. Reder*
Lauren Messonnier Meyers**
Finds that plain language of DGCL §141(k) protects stockholders’ right
to remove members of an unclassified board without cause.
INTRODUCTION ............................................................................. 177
I.
IN RE VAALCO ENERGY, INC. STOCKHOLDER LITIGATION . 179
A.
Factual Background ............................................... 179
B.
Litigation Ensues ................................................... 180
C.
Vice Chancellor Laster’s Analysis of the
“Wacky” Provisions ................................................. 180
CONCLUSION ................................................................................ 182
INTRODUCTION
Corporations seek to maintain highly valuable flexibility when
structuring their charter documents under the Delaware General
Corporate Law (“DGCL”)—indeed, corporations have long flocked to
this corporate haven to benefit from its hallmark trait of autonomy.
However, if a Delaware corporation abuses this flexibility by adopting
a charter provision that is “contrary to the laws of the State,” that
177
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[Vol. 69:177
provision is invalid.1 Unfortunately, the plain language of the DGCL, at
times, is not so clear.
For example, the DGCL allows a company to structure its board
of directors to be either classified or unclassified. Under Section 141(d)
of the DGCL (“DGCL § 141(d)”), a board may be “divided into 1, 2 or 3
classes.” Typically, a classified (or “staggered”) board is divided into
three separate classes, with each class serving three year terms and
only one class up for election in any year. The classified board is thought
to be the most potent takeover defense because it requires a potential
hostile acquirer to win two consecutive annual election contests to win
a majority position on the board and thereby gain the ability to disarm
the corporation’s other takeover defenses, primarily a stockholders’
rights plan (i.e., a “poison pill”). Inasmuch as most acquirers are not
willing to hold a hostile bid open for the 13-month interval that a
corporation can, under the DGCL, impose between annual meetings,
the classified board structure facilitates a “just say no” takeover
defense.2 By contrast, a corporation whose board is not classified must
hold an annual election for its entire board, whose members serve only
one year at a time.
While a corporation may choose either structure, assuming
stockholders are in agreement, Section 141(k) of the DGCL (“DGCL
§ 141(k)”) offers an important wrinkle when the classified board
structure is selected: “Any director . . . may be removed, with or without
cause, by the holders of a majority of the shares then entitled to vote at
an election of directors, except . . . in the case of a corporation whose
board is classified . . . , stockholders may effect such removal only for
cause.”3 While this provision may seem clear on its face—stockholders
may remove members of a classified board only for cause—this
provision was squarely challenged in In re VAALCO Energy, Inc.
Stockholder Litigation, with implications for approximately 175 other
Delaware public corporations.4
*
Robert S. Reder, Professor of the Practice of Law at Vanderbilt University Law School,
has been serving as a consulting attorney at Milbank, Tweed, Hadley & McCloy LLP in New York
City since his retirement as a partner in April 2011.
** Vanderbilt University Law School, J.D. Candidate, May 2016. I would like to thank
Professor Reder as well as the Vanderbilt Law Review for the ability to participate in the En Banc
series.
1.
DGCL § 102(b)(1).
2.
For a classic demonstration of the operation of a “just say no” defense facilitated by a
classified board structure, see the successful defense by Airgas, Inc. against a premium hostile
takeover bid by its competitor Air Products & Chemicals, Inc. Air Products & Chemicals, Inc. v.
Airgas, Inc., C.A. Nos. 5249, 5256 (Del. Ch. Feb. 15, 2011).
3.
DGCL § 141(k)(1) (emphasis added).
4.
C.A. No. 11775-VCL (Del. Ch. Dec. 21, 2015).
2016]
IN RE VAALCO ENERGY, INC.
179
I. IN RE VAALCO ENERGY, INC. STOCKHOLDER LITIGATION
A. Factual Background
In 2008, VAALCO Energy, Inc. (“VAALCO”)—a “Houston,
Texas-based independent energy company principally engaged in the
acquisition, exploration, development and production of crude oil and
natural gas”—came under pressure from institutional investors to
declassify its Board of Directors.5 Like the boards of numerous other
public corporations facing similar challenges, VAALCO’s Board
succumbed to the pressure and proposed that stockholders amend
Article V, Section 2 of the certificate of incorporation (the
“Declassification Amendment”) at the 2010 annual meeting of
stockholders to read:
From and after the date of the 2010 annual meeting of stockholders, the Board of Directors
shall not be classified and directors shall be elected at each annual meeting for a one-year
term expiring at the next annual meeting.6
Notably, and consistent with DGCL § 141(k), Article V, Section
3 of VAALCO’s certificate of incorporation provided that directors could
be removed by stockholders only “for cause” (the “For Cause Removal
Provision”).7 The Board did not propose to amend the For Cause
Removal Provision as part of the Declassification Amendment. Thus,
when stockholders overwhelmingly approved the Declassification
Amendment, VAALCO was left with something of a hybrid—a
declassified board whose members could be removed from office by
stockholders only for cause. VAALCO’s legal advisors did not invent
this provision from whole cloth; rather, they employed language
typically used by corporations undergoing board declassification.
Fast forward to September 2015, when VAALCO completed a
twelve-month period during which the market value of its common
stock declined by nearly 80%. A group of disappointed activist
stockholders owning approximately 11% of the outstanding shares (the
“Investor Group”) began a consent solicitation to remove and replace
four of VAALCO’s seven directors without cause. In response, VAALCO
claimed that, consistent with the For Cause Removal Provision,
directors could not be removed by stockholders unless they cited
sufficient cause.
5.
Defendants’ Opening Brief in Opposition to Plaintiffs’ Motion for Summary Judgment
and in Support of Defendants’ Motion for Summary Judgment at 6, In re VAALCO, C.A. No. 11775VCL [hereinafter “Defs’ Br.”]; VAALCO Energy, Inc., Annual Report (Form 10-K) (March 16, 2015).
6.
Defs’ Br., supra note 5, at 8.
7.
Id. Article III, Section 2 of VAALCO’s bylaws similarly limit stockholders to “for cause”
removal of directors.
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B. Litigation Ensues
The dispute between the Investor Group and the VAALCO
Board landed in the Delaware Court of Chancery. The Investor Group
asked Vice Chancellor J. Travis Laster to invalidate the For Cause
Removal Provision as contrary to the mandatory provisions of DGCL
§ 141(k). This request was based on the Investor Group’s contention
that DGCL § 141(k) permits only a corporation with a classified board
to limit stockholders to for cause removal of directors.
Vice Chancellor Laster analyzed DGCL §§ 141(d) and 141(k) to
determine their statutory meanings, focusing on the issue whether the
For Cause Removal Provision, which had been duly adopted by
VAALCO stockholders in connection with the earlier establishment of
the classified Board, became invalid when the Board was declassified.
In resolving this issue, the Vice Chancellor tackled two questions: First,
does DGCL § 141(k) explicitly mandate that stockholders may remove
directors without cause unless the board is classified? And, second, does
DGCL § 141(d) permit a classified board having only a single class?
C. Vice Chancellor Laster’s Analysis of the “Wacky” Provisions
Vice Chancellor Laster concluded that the “plain language” of
DGCL § 141 resolved the first question. According to the Vice
Chancellor, DGCL § 141(d) requires that stockholders may remove
directors either with or without cause, subject, “[f]or better or for
worse,” to only the two exceptions set forth in DGCL § 141(k).8 And only
one of those exceptions—when a corporation has a classified board—
was relevant to the issue before him. These are not default provisions
that may be modified in a corporation’s certificate of incorporation, but
rather a “legislative statement of what Delaware law permits.”9 This
analysis rendered the For Cause Removal Provision “contrary to law”
and, therefore, “invalid.”10 Though, in “theory,” allowing a declassified
board to retain for cause removal might not run afoul of Delaware
corporate policy, the Vice Chancellor nevertheless found himself bound
by the plain language of the statute.11
Vice Chancellor Laster considered VAALCO’s argument in
response to the second question to be its “strongest argument.”12
VAALCO contended that because DGCL § 141(d) seemingly permits a
8.
9.
10.
11.
12.
In re VAALCO, C.A. No. 11775-VCL, slip op. at 4.
Id.
Id.
Id.
Id. at 6.
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IN RE VAALCO ENERGY, INC.
181
corporation to have a classified board consisting of only one class,13 a
corporation which declassifies its board into a single class may retain
limited director removal rights. The Vice Chancellor dismissed this
argument in three takes:

First, a “single-class classified board” is a “somewhat oxymoronic
concept” representing a “pretty novel reading of 141(d).”14 In the
absence of “some really good reason for suddenly discovering
something new about a section like 141, particularly when that
interpretation . . . would cut against what . . . has been the
standard analysis of 141(k),” the Vice Chancellor was not
prepared to view the declassified VAALCO Board as a classified
board consisting of a single class.15

Second, the Vice Chancellor offered the opinion that DGCL
§ 141(d)’s formulation that boards may be “divided into 1, 2 or 3
classes” was intended to clarify that “special stock directors,”
also permitted by DGCL § 141(d), do not represent an additional
class (or classes) of directors.16 Rather, “they’re just part of . . .
[an unclassified] board along with everybody else.17

Third, regardless of whether the DGCL permits a single-class
classified board, in the case of VAALCO, this is not “what they
did.”18 It might be “one thing if you went out to your stockholders
and said ‘We are declassifying, and we are declassifying from
three classes into one class, and our newly re-classified one-class
board will have all the attributes of a classified board under
Delaware law and, therefore, will not allow removal except for
cause.’ ”19 However, the only matter that VAALCO stockholders
voted on was an amendment of the certificate of incorporation to
declassify the board. Under the “venerable principle of
independent legal significance,” the “route” chosen by VAALCO
matters inasmuch as “we value formality” when it comes to
questions of “statutory interpretation.”20 In other words, “the
fact that you might theoretically have gone some heretofore
13.
14.
15.
16.
17.
18.
19.
20.
As noted above, under DGCL § 141(d), a board may be “divided into 1, 2 or 3 classes.”
In re VAALCO, C.A. No. 11775-VCL, slip op. at 7.
Id. at 8.
Id.
Id. at 9.
Id. at 10.
Id.
Id.
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unforeseen path towards a single-class classified board for which
directors would be removable only for cause doesn’t mean that
because you ended up with something that you’d like to say is
the functional equivalent of that you get the benefit.”21
Lastly, Vice Chancellor Laster had to address VAALCO’s
argument that a ruling in favor of the Investor Group “upsets
expectations at some . . . 175 public companies that may have some
strange combination of provisions that attempts to achieve the same
result.”22 The Vice Chancellor quickly dismissed this concern, offering
the admonishment that “wacky provisions” adopted as “a consequence
of people not reading the statute” do not excuse corporations from
following the plain language of the DGCL.23
On this basis, Vice Chancellor Laster granted the Investor
Group’s summary judgment motion and entered an order declaring the
For Cause Removal Provision invalid.24 Two days later, VAALCO
settled the dispute by (among other actions) securing the resignations
of two incumbent directors and agreeing to fill the vacancies with an
Investor Group designee and an independent director to be mutually
agreed upon by the VAALCO Board and the Investor Group.
CONCLUSION
In re VAALCO offers a note of caution to legal advisors who draft
charter and bylaw provisions on behalf of their corporate clients. It is
no coincidence that some 175 public Delaware corporations employ the
same “wacky” declassified board structure limiting stockholders to for
cause removal of directors as the one invalidated by Vice Chancellor
Laster. Like VAALCO, many, if not most, of these companies were
forced to declassify their boards by a combination of activist investors
and corporate governance advocates. For better or worse, as one of your
authors can testify from personal experience, corporate lawyers often
follow the bromide “if it ain’t broke, don’t fix it” when it comes to
drafting public company charter and bylaw provisions. As such, they
21. Id. at 10–11.
22. Id. at 11. To further minimize the impact of this argument, Vice Chancellor pointed out
that the 175 companies with the “wacky provisions” represent “less than 5 percent” of all public
companies. Id. at 11–12.
23. Id. at 11.
24. Although VAALCO’s charter documents did not contain a “severability provision,” the
Vice Chancellor instructed that Delaware’s “general default common law rule is that . . . provisions
in a charter and bylaws . . . are severable.” Thus, the other provisions of VAALCO’s charter
documents were not impacted by the Vice Chancellor’s invalidation of the For Cause Removal
Provision. Id. at 5–6.
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IN RE VAALCO ENERGY, INC.
183
are inclined to follow public company precedent on file with the SEC.
VAALCO’s Declassification Amendment certainly reflected the
available precedent for declassifying corporate boards. However, now
that these provisions are “broke” in light of Vice Chancellor Laster’s In
re VAALCO ruling, they need to be “fixed” and should no longer be
perpetuated.25
25. In re VAALCO is somewhat reminiscent of the controversy over the interpretation of
another classified board provision in Airgas, Inc. v. Air Products & Chemicals, Inc., No. 649, 2010
(Del. Nov. 23, 2010). In that case, the Delaware Supreme Court reversed a Court of Chancery
ruling supporting an interpretation of Airgas’s classified board provision that would have created
a serious problem for far more than 175 public companies. Airgas represented a pure case of
contract interpretation, however, without any allegation that the provision in question (regardless
of how interpreted) violated DGCL § 141.